What Can Credit Markets Tell Us About the Chances of a US Recession?

Goldman Sachs Exchanges

Goldman Sachs

Business

4.4 • 1K Ratings

🗓️ 11 March 2019

⏱️ 27 minutes

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Summary

A Goldman Sachs Research study of the last 100 years suggests US recessions can be boiled down to five major causes - and several (like industrial and oil supply shocks) look structurally less threatening today. But among those that still bear close watching are the financial balances of households and corporations, which GS Research's Chief Credit Strategist Lotfi Karoui says aren't showing signs of a private sector living beyond its means. Outstanding mortgage debt has declined drastically and consumer credit growth has slowed to a four-cycle low, while on the corporate side, strong profitability and debt-servicing capacity are providing a buffer for rising net leverage. That said, there are several pockets of risk - including the growth in leveraged loans, direct lending, and delinquencies in the subprime auto loan market - but Karoui thinks it's unlikely we'll see them drag the broader economy into a downturn. This podcast was recorded on February 26, 2019. All price references and market forecasts correspond to the date of this recording. This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity. Copyright 2019 Goldman Sachs & Co. LLC. All rights reserved.

Transcript

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0:00.0	This is exchanges at Goldman Sachs, where we discuss developments currently shaping markets, industries, and the global economy.
0:14.4	I'm Jake Stewart, global head of corporate communications here at the firm.
0:18.0	Earlier this year, Goldman Sachs research publisher report called Learning from a century of U.S.
0:22.1	Recession, and it went through five historical causes of recessions
0:27.2	and looked at each one of them to address the question that's on every investor's
0:30.5	mind today.
0:31.5	How far away is the next downturn? Today we're doing a deep
0:34.4	dive into just one of those causes, private sector financial imbalances, and
0:38.1	what different pockets of the credit market can tell us about the risk of another
0:41.8	recession.
0:42.8	We're joined by Lottvie, chief credit strategist for Goldman Sachs research.
0:47.1	Lottvie, welcome to the program.
0:48.9	Thanks for happening.
0:50.1	So let's start with some definitional issues.
0:52.1	When we talk about private sector financial imbalances,
0:54.6	what are we really looking at in the economy and why is it a good indicator of the risk of a recession?
0:59.7	What we're basically looking at is whether the private sector is living beyond its means or not.
1:04.8	And so the private sector financial balance, when we say private sector, we mean households and
1:09.3	corporations.
1:10.9	That typically refers to total income minus total spending and when it goes into negative territory
1:16.4	It tells you that the private sector is actually into deficit territory
1:20.3	Which generally leads to asset bubbles and eventually leads to a recession or an economic downturn.
	...

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